ULJANIK d.d., Pula · ULJANIK d.d. Responsibility for the consolidated financial statements 1...

ULJANIK d.d., Pula

CONSOLIDATED ANNUAL REPORT 31 DECEMBER 2016

Contents

Page

Responsibility of the Management Board 1

Independent Auditor's Report 2 – 9

Consolidated statement of comprehensive income 10

Consolidated statement of financial position 11

Consolidated statement of changes in equity 12

Consolidated cash flow statement 13

Notes to the consolidated financial statements 14- 57

ULJANIK d.d.

Responsibility for the consolidated financial statements

1

Pursuant to the Accounting Act of the Republic of Croatia, the Management Board is responsible for

ensuring that consolidated financial statements are prepared for each financial year in accordance with

International Financial Reporting Standards as adopted in the European Union (IFRS) and as published by

the International Accounting Standards Board, which present fairly the financial position and results of

ULJANIK d.d. and its subsidiaries (hereinafter: the "Group").

After making enquiries, the Management Board has a reasonable expectation that the Group has adequate

resources to continue in operational existence for the foreseeable future. For this reason, the Management

Board continues to adopt the going concern basis in preparing the financial statements.

In preparing the financial statements, the responsibilities of the Management Board include ensuring that:

suitable accounting policies are selected and then applied consistently;

judgements and estimates are reasonable and prudent;

applicable accounting standards are followed, subject to any material departures disclosed and

explained in the financial statements; and

the financial statements are prepared on the going concern basis unless it is inappropriate to

presume that the Group will continue in business.

The Management Board is responsible for keeping proper accounting records, which disclose with

reasonable accuracy at any time the financial position of the Group and must also ensure that the financial

statements comply with the Croatian Accounting Act. The Management Board is also responsible for

safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and

detection of fraud and other irregularities.

Signed on behalf of the Management Board:

Gianni Rossanda, Board president

Veljko Grbac, Board member

Marinko Brgić, Board member

ULJANIK d.d.

Flaciusova 1

Pula

Republic of Croatia

Pula, 24 April 2017

PricewaterhouseCoopers d.o.o., Ulica kneza Ljudevita Posavskog 31, 10000 Zagreb, Hrvatska T: +385 (1) 6328 888, F:+385 (1) 6111 556, www.pwc.hr Commercial Court in Zagreb, no. Tt-99/7257-2, Reg. No.: 080238978; Company ID No.: 81744835353; Founding capital: HRK 1,810,000.00, paid in full; Management Board: J. M. Gasparac, President; S. Dusic, Member; T. Macasovic, Member; Giro account: Raiffeisenbank Austria d.d., Petrinjska 59, Zagreb, IBAN: HR8124840081105514875.

Independent auditor’s report

To the shareholders and Management Board of Uljanik d.d.

Our qualified opinion

In our opinion, except for the possible effects of the matters 1, 2 and 3 described in the Basis for qualified opinion section of our report, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Uljanik d.d. and its subsidiaries (the Group) as at December 31, 2016, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted in the European Union.

What we have audited

Uljanik d.d. consolidated financial statements comprise:

the consolidated statement of financial position as at December 31, 2016;

the consolidated statement of profit or loss and other comprehensive income for the year then ended;

the consolidated statement of changes in equity for the year then ended;

the consolidated statement of cash flows for the year then ended; and

the notes to the consolidated financial statements, which include a summary of significant accounting policies and other explanatory notes.

Basis for qualified opinion

1. As described in notes 6 and 23, the Group recognised receivables in relation to government grants amounting to HRK (Croatian kuna) 134 million (2015: HRK 170 million) at the balance sheet date and income from government grants amounting to HRK 141 million for the year ended 31 December 2016 and to HRK 136 million for the year ended 31 December 2015. In accordance with IAS 20 “Accounting for government grants and disclosure of government assistance”, government grants shall not be recognised until there is reasonable assurance that the entity will comply with the conditions attached to them and the grants will be received. In the absence of the required information to enable us to assess the amount of government grants to be recognised, we were unable to satisfy ourselves as to the carrying amount of government grants receivable recognised as at 31 December 2016 and 31 December 2015, and government grants income for the years then ended.

2. Included in Trade and other receivables as at 31 December 2016 are receivables due from Government ministries and other customers amounting to HRK 53 million (2015: HRK 73 million) which are overdue for more than 120 days. Management has carried out an impairment review of these assets as at the balance sheet date to determine whether any impairment write down should be applied and has assessed these assets as recoverable. However, based on our audit procedures performed and due to existing uncertainties regarding the timely collection and expected cash flows related to these assets, we were unable to satisfy ourselves as to whether these assets are impaired, and therefore their carrying amounts as at 31 December 2016 and 31 December 2015.

http://www.pwc.hr/

3. Included in Property, plant and equipment as at 31 December 2016 are two vessels (bulk carriers) in total amount of HRK 367 million stated at the balance sheet date. The Management has carried out an internal review of these assets to determine whether the assets impaired and has assessed these assets as recoverable. However, based on our audit procedures performed and due to existing uncertainties regarding the prices which could be achieved at current market for these types of vessels, we were unable to satisfy ourselves as to whether these assets are impaired, and therefore their carrying amounts as at 31 December 2016.

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report.

We believe that the audit evidence, except for the matters described in 1,2 and 3 above, we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.

Independence

We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code). We have fulfilled our other ethical responsibilities in accordance with the IESBA Code.

Our audit approach

Overview

Materiality

Overall Group materiality: HRK 11.4 million, which represents 5% of

Average Result before tax for the last three years (Average RBT).

Audit scope

We conducted full scope audit work at 10 reporting units: (Croatian companies subject to statutory audit) in a single country.

At Group level, we also performed specified procedures and overall analytics

for 3 subsidiaries and 4 associates.

Our audit scope addressed 95% of the Group’s revenues and 90% of the Group’s absolute value of underlying result.

Key audit matters

Revenue recognition for ship buildings and provisions for expected

losses

Stock valuation

Valuation and impairment of vessels (property, plant and equipment)

How we designed audit scope

We designed our audit by determining materiality and assessing the risks of material misstatement in the consolidated financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.

Materiality

The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.

Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole.

Overall group materiality HRK 11.4 million

How we determined it 5% of Average result before tax (RBT), (average of last three

years)

Rationale for the

materiality benchmark

applied

We chose average RBT as the benchmark because, in our view, it

is a most appropriate measure for assessing the performance of

the Group taking into consideration significant fluctuations in

revenues, expenses and results due to long construction process,

and is a generally accepted benchmark. We selected 5% based on

our professional judgement, noting that it is also within the

range of commonly acceptable quantitative materiality

thresholds in auditing standards.

How we tailored our group audit scope

We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates.

Considering our ultimate responsibility for the opinion on the Group’s consolidated financial statements we are responsible for the direction, supervision and performance of the group audit. In this context, we have determined the nature and extent of the audit procedures for components of the Group to ensure that we performed enough work to be able to give an opinion on the consolidated financial statements as a whole.

Determining factors were the geographical structure of the Group, the financial significance and/or risk profile of the Group entities and activities, the accounting processes and controls, and the industry in which the Group operates. On this basis, we selected Group entities for which an audit of financial information or specific balances was considered necessary.

In establishing our overall approach to audit the Group, we considered the significance of the components to the Group financial statements, our assessment of risk within each component, the overall coverage across the Group achieved by our procedures, as well as the risk associated with less significant components not brought into the full scope of our audit. We determined the type of work for each component that needed to be performed by us in relation to activity within Croatia where the work was performed by another firm, we determined the level of involvement we needed to have in their audit work to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Group financial statements as a whole. We conducted full scope audit work at 10 reporting units: (Croatian companies subject to statutory audit) in a single country. At Group level, we also performed specified procedures for 3 components and 4 associates. Our audit scope addressed 95% of the Group’s revenues and 90% of the Group’s absolute value of underlying profit.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matters described in the Basis for qualified opinion section, we have determined the matters described below as the key audit matters to be communicated in our report.

Key audit matter How our audit addressed the Key audit

matter

Revenue recognition for ship buildings and

provisions for expected losses

Refer to note 2.23 of the financial statements

under heading “Ship construction contracts”

and note 2.21 “Provisions” (accounting

policies), note 4 (Critical accounting

estimates) and notes 5, 23, 28 and 30

We focused on recognition of revenue because

there are large commercial contracts for

building sophisticated and complex ships

which are a significant part of the business. We

also focused on this area due to significant

level of estimations made by the Group’s

We assessed the consistency of the application of

the revenue recognition policy of the Group’s

revenues. Where effective and efficient, we tested

the design and operating effectiveness of the

controls over revenue systems across the Group to

determine the extent of additional substantive

testing required. We found no material

misstatements nor control deficiencies from our

testing.

In addition we have performed detailed test of

major new contracts which include testing the

relevant supporting documentation (Shipbuilding

management in assessing margins and possible

contract losses.

The Group is currently involved in 20 ship

buildings. For 13 buildings the Management

assessed that the outcome (margin) cannot be

estimated reliably (due to sophisticated

technical requirements) and therefore the

contract revenue is recognised only to the

extent of contract costs incurred that are likely

to be recoverable. For the rest of the ship

buildings revenues are recognized on the basis

of stage of completion.

The customer payment milestones set in the

contracts usually do not follow revenue

recognition criteria in accordance with IAS 11

and involve significant amounts of advances.

As a result in the financial statements the

Company presents gross amounts due from/to

customers for all active projects at the balance

sheet date on the basis of stage of completion.

As disclosed in Note 23 gross amount due

from customers (net) amounts to HRK 575

million thousand at the balance sheet date.

Further, the Management assessed the level of

provisions needed for expected losses on

contracts as the difference between expected

costs of each contact and the contracted selling

price. For certain buildings, the management

assessed that there are currently no indications

that the contract costs will exceed contract

revenues and therefore assessed that provision

for losses is not needed at the balance sheet

date.

The total provision for expected losses under

IAS 11 amounts to HRK 87.5 million at the

balance sheet date.

contracts, approved estimations of total contract

costs, actual costs summaries, sample of invoices

and timecards, analytics and similar)in relation to

significant projects in the current year.

We checked that revenue had been recognised in accordance with the requirements of IAS 11 by testing a sample of transactions and comparing the timing of revenue recognition to stage of completion based on the proportion of contract costs incurred for work performed to date to estimated total contract costs. No exceptions were noted from our testing which would be reported.

In relation to provision for expected losses recognized in the current year, on the basis of provided documentation and explanation in course of our audit we found the management assessment acceptable.

Our work also included testing a sample of manual

journals which did not identify any items that could

not be substantiated.

We found disclosures in the financial statements in

relation to the accounting for revenues, provisions

for expected losses and amounts due/from

customers for work performed appropriate.

Stock valuation

Refer to note 2.15 of the consolidated financial

statements under heading “Inventories”

(accounting policies), note 4 (Critical

accounting estimates) and note 22

The valuation of stock was in focus because of

the nature of the judgements made by the

management when assessing the level of write

downs required.

As disclosed in notes 2.15 and 4 to the

consolidated financial statements, write downs

are recognized in case when the management

assess there is a need to reduce inventory from

cost to net realisable value based on the

predetermined criteria.

The Management applies a judgement to the

period-end stock level in order to determine the

appropriate level of write down allowance, taking

into consideration the stock ageing structure, the

current stock profile and need for certain materials

in relation to current Orderbook (containing all

contracted ship buildings).

We have obtained stock ageing structure and

detailed stock analysis at the balance sheet date for

the most significant stock types prepared by the

Group explaining the needs and specifics for

certain materials/group of materials, expectations

of future consumption in relation to current

Orderbook and assessment of net realisable value

The calculation of net realisable value takes

into account the intended use of the inventory

(most inventories are used in ship buildings

where production cycle lasts on average 2 to 3

years).

The cumulative write down account amounts

to HRK 20.5 million at the balance sheet date.

at the balance sheet date.

We assessed this provision by testing the accuracy

of the stock ageing structure on the sample basis,

reviewing the detailed stock analysis and the

explanations provided by management on the

current profile, noting no significant issues.

Valuation and impairment of vessels

(property, plant and equipment)

Refer to note 2.6 of the consolidated financial

statements (accounting policies) and note 15

We focused on this area due to significant level

of estimations made by the Group’s

management in assessing recoverable values of

vessels.

The Group has two vessels (bulk carriers) with

aggregate carrying values of HRK 367 million

as at 31 December 2016. Following a review of

the business and the outlook for the industry,

management has assessed these carrying

values. The Management concluded that the

recoverable amount was higher than their

carrying values such that no impairment

provision is required.

These conclusions are dependent upon

significant management judgement, including

estimated resale value, utilisation and disposal

value.

The Management made internal analysis of

second-hand market for bulk carriers (vessels

of similar type and age) and concluded that the

impairment loss is not needed at the balance

sheet date.

Our procedures in relation to management’s

impairment assessment of vessels included:

Reviewing the results of subsidiaries

managing the vessels

Reviewing the internal analysis prepared

by the Management

Challenging the management related to

their assessment that no impairment is

needed

Asking for independent appraisal for

vessels, which was not obtained.

Since we have not been able to obtain sufficient

audit evidence that the value of these vessels is not

impaired at the balance sheet date the matter is

qualified in our auditors’ report for the year ended

31 December 2016.

We found the disclosures in the notes to the

consolidated financial statements to be

appropriate.

Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International financial reporting standards as adopted in the European Union, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

Auditor’s responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the [consolidated] financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The certified auditor engaged as partner on the audit resulting in this independent auditor's report is Kristina Dimitrov.

PricewaterhouseCoopers d.o.o. John M Gasparac

Zagreb, 24 April 2017 President of the Management Board

Kristina Dimitrov

Certified auditor

This version of our report is a translation of a portion of the original, which was prepared in Croatian language. All possible care

has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of

interpretation of information, views or opinions, the original language version of our report takes precedence over this

translation.

ULJANIK d.d.

Consolidated statement of comprehensive income

For the year ended 31 December 2016

(all amounts expressed in thousands of HRK)

The accompanying notes form an integral part of these financial statements.

10

Note 2016 2015

Sales 5 1,930,765 1,328,176

Change in provisions for expected losses on new buildings and warranties

28 83,989 181,060

Government grants 6 141,733 137,198

Other income 7 55,894 51,799

Change in value of work in progress 19,326 6,182

Cost of materials and services 8 (1,509,363) (977,312)

Staff costs 9 (578,301) (526,174)

Amortisation and depreciation 14, 15, 16 (65,150) (61,062)

Other operating expenses 10 (148,558) (121,940)

Other gains – net 11 5,105 18,840

Operating (loss)/profit (64,560) 36,767

Finance income 78,848 49,503

Finance costs (163,064) (153,438)

Finance costs - net 12 (84,216) (103,935)

Share in (loss)/profit of associates (10,723) 96

Loss before tax (159,499) (67,072)

Income tax 13 (13,529) (3,509)

Loss for the year (173,028) (70,581)

Other comprehensive income

Items that may be reclassified to profit or loss:

Exchange differences on translation of foreign operations

26,747 11,123

Items that will not be reclassified to profit or loss:

Gain on revaluation of equipment 42,521 -

Income tax related to this item (7,654) -

Other comprehensive income, net of tax 61,614 11,123

Total comprehensive loss (111,414) (59,458)

Net loss attributable to:

The Company's owners (176,959) (91,501)

The non-controlling interest 3,931 20,920

Comprehensive loss attributable to:

The Company's owners (115,345) (80,378)

The non-controlling interest 3,931 20,920

Loss per share (in HRK) – basic and diluted 33

(54.42) (28.14)

ULJANIK d.d.

Consolidated statement of financial position

As at 31 December 2016


The accompanying notes form an integral part of these financial statements.

11

ASSETS Note 31/12/2016 31/12/2015

Non-current assets

Intangible assets 14 185,665 188,623

Goodwill 34 21,512 -

Property, plant and equipment 15 749,344 430,576

Investment property 16 88,719 89,664

Investments in subsidiaries 18 28 29

Investments in associates 18 254,722 246,094

Other non-current receivables 19 24,971 33,747

Deposits and loans receivable 20 362,735 191,437

Other financial assets 337 322

Financial assets at fair value through profit or loss 21 1,236 1,113

1,689,269 1,181,605 Current assets

Inventories 22 856,282 292,640

Trade and other receivables 23 1,418,967 1,094,462

Deposits and loans receivable 20 17,246 122,693

Cash and cash equivalents 24 103,781 281,678

2,396,276 1,791,473 Total assets 4,085,545 2,973,078 EQUITY

Share capital 25 100,688 100,688

Capital reserves 25 216,566 216,566

Treasury shares 25 (4,697) (4,697)

Reserves for treasury shares 4,700 4,700

Other reserves 23,475 10,342

Currency translation reserves 66,384 39,637

Revaluation reserves 34,867 -

Accumulated losses (550,510) (371,037)

(108,527) (3,801)

Non-controlling interest 26 128,691 124,759

Total equity 20,164 120,958

LIABILITIES

Non-current liabilities

Trade payables 17,586 -

Deferred tax liability 13 19,537 -

Borrowings 27 686,603 651,220

Provisions 28 18,506 58,853

742,232 710,073 Current liabilities

Trade and other payables 29 669,157 433,844

Advances received 30 1,340,963 873,494

Borrowings 27 1,220,722 660,495

Provisions 28 92,307 174,214

3,323,149 2,142,047 Total liabilities 4,065,381 2,852,120

Total equity and liabilities 4,085,545 2,973,078

ULJANIK d.d.

Consolidated statement of changes in equity



The accompanying notes form an integral part of these financial statements. 12

Share

capital

Capital

reserves

Res. for

treasury

shares

Other

reserves

Revaluation

reserves

Currency

trans.res.

Treasury

shares

Accumulate

d losses

Ow ners'

equity

Non-

controlling

interest

Total

Balance as at 1 January 2015 302,063 15,191 4,700 5 - 28,514 (4,697) (286,470) 59,306 109,921 169,227

Loss for the year - - - - - - - (91,501) (91,501) 20,920 (70,581)


Exchange differences on translation of

foreign operations- - - - - 11,123 - - 11,123 - 11,123

Total comprehensive loss - - - - - 11,123 - (91,501) (80,378) 20,920 (59,458)

Transactions with owners

Decrease of share capital (201,375) 201,375 - - - - - - - - -

Transfer to reserves - - - 10,337 - - - (10,337) - - -

Correction of error - - - - - - - 16,026 16,026 - 16,026

Merger - - - - - - - (3,698) (3,698) - (3,698)

Transactions w ith non-controlling interest - - - - - - - 4,942 4,942 (6,081) (1,139)

(201,375) 201,375 - 10,337 - - - 6,933 17,270 (6,081) 11,189

Balance as at 31 December 2015 100,688 216,566 4,700 10,342 - 39,637 (4,697) (371,038) (3,802) 124,760 120,958

Loss for the year - - - - - - - (176,959) (176,959) 3,931 (173,028)


Exchange differences on translation of

foreign operations- - - - - 26,747 - - 26,747 - 26,747

Revaluation - gross - - - - 42,671 - - - 42,671 - 42,671

Deferred tax - - - - (7,681) - - - (7,681) - (7,681)

Depreciation transfer - gross - - - - (150) - - - (150) - (150)

Deferred tax - - - - 27 - - - 27 - 27

Total comprehensive loss - - - - 34,867 26,747 - (176,959) (115,345) 3,931 (111,414)

Transactions with owners

Impairment reversal of receivables from

subsidiares- - - - - - - 10,620 10,620 - 10,620

Transfer to reserves - - - 13,133 - - - (13,133) - - -

- - - 13,133 - - - (2,513) 10,620 - 10,620

Balance as at 31 December 2016 100,688 216,566 4,700 23,475 34,867 66,384 (4,697) (550,510) (108,527) 128,691 20,164

ULJANIK d.d.

Consolidated statement of cash flows



The accompanying notes form an integral part of these financial statements. 13

Note 2016 2015

Cash flow from operating activities

Loss before tax (159,499) (67,072)

Adjustments for:

Amortisation and depreciation 14,15,16 65,150 61,062

Write-off of tangible and intangible assets 827 233

Impairment of receivables and loans - 371

Net movement in provisions 28 (122,254) (221,435)

Fair value adjustments - receivables (2,897) (5,968)

Fair value adjustments - shares (123) 243

Dividend income (9) (58)

Interest income (23,598) (2,438)

Interest expense 104,713 78,161

Deferred taxes, exchange differences and other

adjustments (57,128) 5,534

Operating result before changes in working capital

(194,818) (151,367)

Increase in trade receivables, other receivables and construction contracts

(521,642) (112,315)

Increase in inventories (563,642) (4,678)

Decrease in trade payables, advances payable and other liabilities

710,182 469,398

Cash generated from operations (569,920) 201,038

Interest paid (104,713) (78,161)

Income tax paid (3,343) (3,509)

Net cash (used in)/from operating activities (677,976) 119,368

Cash flow from investing activities

Purchase of property, plant and equipment 15 (55,047) (7,406)

Purchase of intangible assets 14 (5,691) (4,601)

Dividend received 9 58

Net movement in investments - 150

Loans granted (1,798) (15,585)

Repayment of loans granted 2,884 4,125

Repayment of deposit 232,605 407,086

Term deposits (292,091) (522,196)

Interest received 23,598 2,438

Net cash used in investing activities (95,531) (135,931) Cash flow from financing activities

Transactions with non-controlling interests - (1,138)

Proceeds from borrowings 898,567 755,154

Repayments of borrowings (302,957) (566,456)

Cash generated from financing activities 595,610 187,560

Net increase/(decrease) in cash and cash equivalents

(177,897) 170,997

Cash and cash equivalents at beginning of year 281,678 110,681

Cash and cash equivalents at end of year 24 103,781 281,678

ULJANIK d.d.

Notes to the consolidated financial statements



14

NOTE 1 – GENERAL INFORMATION

The company ULJANIK d.d. was established in 1992 and is registered at the Commercial Court in Rijeka.

The Company’s registered office is in Pula, Flaciusova 1, Croatia. The Company's principal activities are

related party management and the provision of procurement, sales, project design and financial services to

subsidiaries. The Group's principal activities are building ships of a high degree of complexity and marine

engines, as well as manufacturing other metal structures.

The ULJANIK Group comprises the parent company ULJANIK d.d., Pula and 11 subsidiaries. In June 2015

the parent Company purchased 230,823 ordinary shares of the company 3. MAJ Motori i dizalice d.d.

representing 100% share for the consideration of 1 kuna. As of 30 November 2016 this company was

merged with ULJANIK Strojogradnja d.d. into newly established company ULJANIK Strojogradnja Diesel

d.d., with the effective date as of 1 December 2016. Supervisory and Management Board Supervisory Board:

Renata Kašnjar-Putar, President

Đino Šverko, Deputy president

Andrija Hren, Member

Rajko Kutlača, Member

Marko Pokrajac, Member Management Board:

Gianni Rossanda, President of the Management Board

Veljko Grbac, Member of the Management Board

Marinko Brgić, Member of the Management Board

The Company is the parent company of the Uljanik Group (the Group) which consists of the following entities (consolidated subsidiaries):

Ownership %

Name of subsidiary

2016

2015

ULJANIK Brodogradilište d.d., Pula 100% 100%

3.MAJ Brodogradilište d.d., Rijeka 85,46% 85,46%

ULJANIK Strojogradnja Diesel d.d., Pula 100% 100%

ULJANIK Proizvodnja opreme d.d., Vodnjan 100% 100%

ULJANIK Poslovno informacijski sustavi d.o.o., Pula 100% 100%

ULJAIK Brodograđevni projekti d.o.o., Pula 100% 100%

ULJANIK Financije d.o.o., Pula 100% 100%

ULJANIK Standard d.o.o., Pula 100% 100%

USCS d.o.o., Pula 100% 100%

MARITIME TRANSPORT PULA THREE INC, Liberia 100% 100%

MARITIME TRANSPORT PULA FOUR INC, Liberia 100% -

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NOTE 1 – GENERAL INFORMATION (CONTINUED)

The following subsidiaries are immaterial and are not consolidated at the Group level:

Ownership %

Name of subsidiary

2016

2015

3. MAJ Motori i dizalice d.d., Rijeka - 100%

BRODO OPUS d.o.o., Pula 100% 100%

Maritime Transport Pula One Inc., Liberia 100% 100%

Maritime Transport Pula Two Inc., Liberia 100% 100%

United Shipping Services Sixteen Inc., Liberia - 100%

The company 3. MAJ Motori i dizalice d.d., Rijeka has been merged with the company ULJANIK

Strojogradnja Diesel d.d in accordance with the Commercial court resolution as of 30 November 2016. 3.

MAJ Motori i dizalice d.d. is no longer classified as subsidiary held for disposal and has been consolidated

within Uljanik group from that date. The company United Shipping Services Sixteen Inc., Liberia has been

renamed into MARITIME TRANSPORT PULA FOUR INC, Liberia. In 2016 this subsidiary started with its

activities and has been included in consolidated accounts.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of these financial statements are set out below.

These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial

Reporting Standards (IFRS) as adopted in the EU. The financial statements have been prepared under the

historical cost convention, except for financial assets at fair value through profit or loss, which are carried at

fair value, as disclosed in the accounting policies.

The preparation of financial statements in conformity with International Financial Reporting Standards

(IFRS) as adopted in the EU requires the use of certain critical accounting estimates. It also requires

management to exercise its judgement in the process of applying the Company's accounting policies. The

areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are

significant to the financial statements, are disclosed in Note 4.

These financial statements have been prepared under the assumption that the Group will be able to

continue as a going concern (Note 35).

The global shipbuilding industry crisis, which has been lasting for years, is coming to an end, and 2016 and

2015 saw an increased contracting of work with particular focus on specialised sectors of the new

constructions where the ULJANIK Group sees its future. The strategic orientation of the ULJANIK Group is

directed towards offshore markets and the special-purpose ship markets where considerably higher

revenues would be achieved, while optimising costs and achieving full employment in both shipyards which

will ensure better business results from 2017 onwards.

(a) New and amended standards, amendments and interpretations adopted by the Group

The Group has adopted new and amended standards for their annual reporting period commencing 1

January 2016 which were endorsed by the European Union and which are relevant for the Group's financial

statements:

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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1 Basis of preparation (continued)

• Clarification of Acceptable Methods of Depreciation and Amortisation – Amendments to IAS 16

and IAS 38.

• Annual Improvements to IFRSs 2012-2014 Cycle comprising changes to four standards (IFRS

5, IFRS 7, IFRS 19, IAS 34).

The adoption of the improvements did not have any impact on the current period or any prior period and is

not likely to affect future periods.

(b) Standards, amendments and interpretations issued but not yet effective

Certain new standards and interpretations have been published that are not mandatory for 31 December

2016 reporting periods and have not been early adopted by the Group. None of these is expected to have

significant effect on the Group's financial statements, except for the following standards:

IFRS 15 Revenue from contracts with customer and associated amendments to various other standards

(effective for annual periods beginning on or after 1 January 2018)

The IASB has issued a new standard for the recognition of revenue. This will replace IAS 18 which covers

contracts for goods and services and IAS 11 which covers construction contracts.

The new standard is based on the principle that revenue is recognised when control of a good or service

transfers to a customer – so the notion of control replaces the existing notion of risks and rewards.

Key changes to current practice are:

• Any bundled goods or services that are distinct must be separately recognised, and any discounts

or rebates on the contract price must generally be allocated to the separate elements

• Revenue may be recognised earlier than under current standards if the consideration varies for any

reasons (such as for incentives, rebates, performance fees, royalties, success of an outcome etc) –

minimum amounts must be recognised if they are not at significant risk of reversal)

• The point at which revenue is able to be recognised may shift: some revenue which is currently

recognised at a point in time at the end of a contract may have to be recognised over the contract

term and vice versa

• There are new specific rules on licenses, warranties, non- refundable upfront fees and,

consignment arrangements, to name a few; and

• As with any new standard, there are also increased disclosures.

Entities will have a choice of full retrospective application, or prospective application with additional

disclosures.

Management is currently assessing the impact of the new rules of IFRS 15 and has identified the following

areas that are likely to be affected:

• The point of revenue recognition in the case of contracting projects without margin

• Extended warranties, which will need to be accounted for as separate performance obligations,

which will delay the recognition of a portion of the revenue.

At this stage, the Group is not able to estimate the impact of the new rules on the Group's financial

statements, it will make more detailed assessments of the impact over the next twelve months. The

Management plans to adopt the standard on its effective date.

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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


IFRS 9 Financial instruments and associated amendments to various other standards (effective for annual

periods beginning on or after 1 January 2018)

IFRS 9 addresses the classification, measurement and derecognition of financial assets and financial

liabilities and introduces new rules for hedge accounting. In December 2014, the IASB made further

changes to the classification and measurement rules and also introduced a new impairment model. With

these amendments, IFRS 9 is now compete.

The Management of the Group assessed the impact of the new standard IFRS 9 on its financial statements

as follows:

o Following the changes approved by the IASB in July 2014, the Group no longer expects any

impact from the new classification, measurement and derecognition rules on the Group’s

financial assets and financial liabilities.

o While the Group has yet to undertake a detailed assessment of the debt instruments currently

classified as available-for-sale financial assets, it would appear that they would satisfy the

conditions for classification as at fair value through other comprehensive income (FVOCI)

based on their current business model for these assets. Hence there will be no change to the

accounting for these assets.

o There will also be no impact on the Group’s accounting for financial liabilities, as the new

requirements only affect the accounting for financial liabilities that are designated at fair value

through profit or loss and the Group does not have any such liabilities.

o The new hedging rules align hedge accounting more closely with the Group’s risk

management practices. As a general rule it will be easier to apply hedge accounting going

forward as the standard introduces a more principles-based approach. The new standard also

introduces expanded disclosure requirements and changes in presentation.

o The new impairment model is an expected credit loss (ECL) model which may result in the

earlier recognition of credit losses.

o The Group has not yet assessed how its own hedging arrangements and impairment

provisions would be affected by the new rules.

The Management plans to adopt the standard on its effective date.

IFRS 16 “Leases” (issued in January 2016 and effective for annual periods beginning on or after 1 January

2019)

o IFRS 16 will affect primarily lessee accounting and will result in the recognition of almost all

leases on the balance sheet. The standard removes the current distinction between operating

and financing leases and requires recognition of an asset (the right to use the leased item)

and a financial liability to pay rentals for virtually all lease contracts. An optional exemption

exists for short-term and low-value leases.

o The income statement will also be affected because the total expense is typically higher in the

earlier years of a lease and lower in later years. Additionally, operating expense will be

replaced with interest and depreciation, so key metrics like EBITDA will change.

o Operating cash flows will be higher as cash payments for the principal portion of the lease

liability are classified within financing activities. Only the part of the payments that reflects

interest can continue to be presented as operating cash flows.

ULJANIK d.d.




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o Lessor accounting will not change significantly. Some differences may arise as a result of the

new guidance on the definition of a lease. Under IFRS 16, a contract is, or contains, a lease if

the contract conveys the right to control the use of an identified asset for a period of time in

exchange for consideration.

At this stage, the Group is not able to estimate the impact of the new standard on the Group's financial

statements, it will make more detailed assessments of the impact over the next twelve months. The

Management plans to adopt the standard on its effective date and when endorsed by the European Union.

2.2 Business combinations and goodwill

Subsidiaries are all entities controlled by the Group. The Group controls the entity when the Group is

exposed or is entitle to variable returns from its association with the entity and has the ability to influence

those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which

control is transferred to the Group and are de-consolidated from the date that control ceases.

The Group applies the acquisition method to account for business combinations. The consideration

transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities

incurred to the former owners of the acquiree and the equity interests issued by the Group. The

consideration transferred includes the fair value of any asset or liability resulting from a contingent

consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a

business combination are measured initially at their fair values at the acquisition date. The Group

recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair

value or at the non-controlling interest’s proportionate share of the recognized amounts of acquiree’s

identifiable net assets. Acquisition-related costs are expensed as incurred.

If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously

held equity interest in the acquiree is remeasured to fair value as at the acquisition date through

comprehensive income.

Any contingent consideration to be transferred by the Group is recognized at fair value at the acquisition

date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or

liability is recognized in accordance with IAS 39 either as income or expense or as a change to other

comprehensive income. Contingent consideration that is classified as equity is not remeasured, and its

subsequent settlement is accounted for within equity.

Goodwill is initially measured as the difference between the consideration transferred and the amount of

non-controlling interest in the acquiree in relation to the fair value of identified net assets acquired. If this

consideration is lower than the fair value of the net assets acquired, the difference is recognized in the

statement of comprehensive income.

Intercompany transactions, balances, income and expenses from transactions with Group entities are

eliminated. Gains and losses from intercompany transactions recognised in assets are also eliminated. The

accounting policies of subsidiaries have been changed where necessary to ensure consistency with the

policies adopted by the Group.

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2.3 Investments in associates

In the Group’s financial statements, investments in an associate (generally a shareholding of between 20%

and 50% of voting rights) where significant influence is exercised by the Group, is accounted for using the

equity method less any impairment in assets. Under the equity method, the investment is initially recognised

at cost, and the carrying amount is increased or decreased by the share in profit or loss after the date of

acquisition. An assessment of the investment in an associate is performed when there is an indication that

the asset has been impaired or that the impairment losses recognised in previous years no longer exist.

When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group

does not recognise further losses, unless there is a legal or constructive obligation or it made payments on

behalf of the associate.

Unrealised gains on transactions between the Group and its associate are eliminated to the extent of the

Group’s interest in the associate. Unrealised losses are also eliminated unless the transaction provides

evidence of an impairment of the asset transferred.

2.4 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief

operating decision maker. The chief operating decision maker, who is responsible for allocating resources

and assessing performance of the operating segments, has been identified as the

Management/Supervisory Board that makes strategic decisions.

When identifying operating segments, Management primarily monitors sales of goods or the provision of

services in accordance with the particular Group activities, and has identified the following operating

segments: shipbuilding, engineering, manufacturing of equipment and other. Each of these operating

segments are separately managed since they are determined on the basis of specific market needs.

Policies of valuation/measurement used by the Group for segment reporting are the same as those used

during the preparation of the financial statements. Furthermore, assets which cannot be directly attributable

to certain business segments remain unallocated.

There were no changes in the valuation methods used when determining the profit/loss of an operating

segment compared to the previous periods.

2.5 Foreign currencies

(a) Functional and presentation currency

Items included in the financial statements of the Group are measured using the currency of the primary

economic environment in which the Group operates (‘the functional currency’). The financial statements are

presented in Croatian kuna (HRK), which is the Group’s functional currency and presentation currency. At

31 December 2016, the exchange rate for USD 1 and EUR 1 was 7.17 HRK and 7.557 HRK, respectively

(31 December 2015: HRK 6.992 and HRK 7.635 respectively). Foreign exchange gains and losses from

borrowings and cash equivalents are presented within in finance costs, while all other exchange differences

are recorded within Other gains/(losses) - net.

ULJANIK d.d.




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2.5 Foreign currencies

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates

prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement

of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities

denominated in foreign currencies are recognised in the statement of comprehensive income.

2.6 Property, plant and equipment

Property, plant and equipment is included in the balance sheet at historical cost less accumulated

depreciation and impairment losses, where required, except for specific equipment of motor construction

which is revalued starting from 1 December 2016. Revaluation model includes assessment whether specific

equipment differs significantly from its fair value, and in case it does, it is adjusted to its fair value.

Revaluation gain is recognized within other comprehensive income. Further losses for revalued assets are

recognized in other comprehensive income up to the amount of revaluation reserve. Losses exceeding the

amount of revaluation reserve are recognized in profit or loss. Historical cost includes the cost that is

directly attributable to the acquisition of assets.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as

appropriate, only when it is probable that future economic benefits associated with the item will flow to the

Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to

the income statement during the financial period in which they are incurred. The cost of replacement of

larger items of property, plant and equipment is capitalised, and the carrying amount of the replaced part is

written off.

Land and assets under construction are not depreciated. Depreciation of other assets is calculated using

the straight-line method to allocate their cost over their estimated useful lives, as follows:

Buildings 10 - 40 years

Machinery and equipment 4 - 20 years

Specific equipment for motor construction 24 years

Vessels 20 years

Furniture, tools and other equipment 4 - 10 years

The residual value of an asset is the estimated amount that the Group would currently obtain from disposal

of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition

expected at the end of its useful life. The residual value of an asset is nil if the Group expects to use the

asset until the end of its physical life. The assets’ residual values and useful lives are reviewed, and

adjusted if appropriate, at each balance sheet date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying

amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are

included in 'Other gains – net' in the statement of comprehensive income.

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2.7 Concession on maritime domain

For the purpose of its operations, on its location in Pula the Group uses land (326,471m2) and sea

(340,400m2) areas for which it has obtained a concession from the Republic of Croatia for a period of 30

years starting from 18 January 2011.

For the purpose of its operations, on its location in Rijeka the Group uses land (303,649m2) and sea

(209,165m2) areas for which it has obtained a concession from the Republic of Croatia for a period of 32

years starting from 16 September 1999.

The concessions on maritime domain are governed by the following regulations: the Maritime Code, the

Seaports Act, the Decisions of the Croatian Government on the concession on maritime domain for the

purpose of commercial use of special-purpose ports and the Agreement concluded between the concession

grantor and the concessionaire. Under the Maritime Code, after the expiry of the concession, the

concessionaire is not entitled to indemnity.

If the concessionaire has built any new objects on the maritime domain based on the concession, the

concessionaire is entitled to retain any new facilities and buildings that he has built, if possible, by the nature of

things and without significant damage to the maritime domain. If this is not possible, any facilities and buildings

will be considered part of the maritime domain; however, the grantor may request from the concessionaire to

remove any such facilities and buildings at his cost in part or in full and to restore the maritime domain to its

previous condition. Buildings on the maritime domain are depreciated in line with the concession period. The

Group is obliged to pay an annual fee to the concession grantor, namely the Croatian Government. The fee is

charged to the statement of comprehensive income in the accounting period to which it relates. The annual fee

payable by the concessionaire consists of two elements:

a fixed element set at HRK 3.00 / m2

a variable element set at 1% of the total revenue.

2.8 Intangible assets

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to

use the specific software. These costs are amortised over their estimated useful lives of up to 5 years.

Intangible assets comprise leasehold improvements and are carried at cost. These costs are amortised over

their estimated useful lives from 5 to 20 years.

2.9 Investment property

Investment property includes property held either to earn rental income or for capital appreciation or both.

Investment property is initially carried at cost. The cost of investment property includes the purchase cost and

all other direct costs. Investment property under construction is classified as property, plant and equipment

until the construction is complete, except for land which is immediately recognised as investment property.

After initial recognition, investment property is measured at cost (determined at fair value at the time of

acquisition) less depreciation.

ULJANIK d.d.




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2.10 Impairment of non-financial assets

At each balance sheet date, the Group reviews the carrying amounts of its non-financial assets to determine

whether there is any indication that those assets have suffered an impairment loss. If any such indication

exists, the recoverable amount of the asset is estimated to determine the extent of any impairment loss.

Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the

recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and

consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-

generating units, or otherwise they are allocated to the smallest company of cash-generating units for which a

reasonable and consistent allocation basis can be identified.

The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in

use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that

reflects current market assessments of the time value of money and the risks specific to the asset for which

the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying

amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An

impairment loss is recognised immediately as an expense in the statement of comprehensive income.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit)

is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does

not exceed the carrying amount that would have been determined had no impairment loss been recognised for

the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately

as income in the statement of comprehensive income.

2.11 Financial assets

Investments are recognised and derecognised on the trade date where the purchase or sale of an

investment is under a contract whose terms require delivery of the investment within the time frame

established by the market concerned, and are initially measured at fair value, plus transaction costs, except

for those financial assets classified as at fair value through the statement of comprehensive income, which

are initially measured at fair value.

Financial assets are classified into the following categories: financial assets ‘at fair value through profit or

loss’, financial assets ‘available for sale’ and ‘loans and receivables’. The classification depends on the

nature and purpose of the financial assets and is determined at the time of initial recognition.

Effective interest method

The effective interest method is the method of calculating the amortised cost of a financial asset and of

allocating interest income over the relevant period. The effective interest rate is the rate that exactly

discounts estimated future cash receipts, including all fees on points paid or received that form an integral

part of the effective interest rate, transaction costs and other premiums or discounts, through the expected

life of the financial asset, or, where appropriate, a shorter period.

Income is recognised on an effective interest basis for debt instruments other than those financial assets

designated as at FVTPL.

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2.11 Financial assets

a) Financial assets at fair value through profit or loss (FVTPL)

Financial assets are classified as at FVTPL where the financial asset is either held for trading or it is

designated as at FVTPL.

A financial asset is classified as held for trading if:

it has been acquired principally for the purpose of selling in the near future; or

it is a part of an identified portfolio of financial instruments that the Group manages together and

has a recent actual pattern of short-term profit-taking; or

it is a derivative that is not designated and effective as a hedging instrument.

Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognised in profit or

loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the

financial asset. Fair value is determined in the manner described in Note 3.3.

b) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not

quoted in an active market. They are included in current assets, except for maturities greater than 12

months after the balance sheet date. These are classified as non-current assets. The Group’s loans and

receivables comprise "trade and other receivables", "deposits" and "cash and cash equivalents" in the

balance sheet.

Loans and receivables are carried at amortised cost using the effective interest method.

Impairment of financial assets

The fair values of quoted investments are based on current bid prices. If the market for a financial asset is

not active, the Group establishes fair value by using valuation techniques. These include the use of recent

arm’s length transactions and references to other instruments that are substantially the same, discounted

cash flow analysis and option pricing models, making maximum use of market inputs and relying as little as

possible on entity-specific inputs.

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset

or a group of financial assets is impaired. A significant or prolonged decline in the fair value of the security

below its cost is considered as an indicator that the securities are impaired.

A provision for impairment of receivables is established when there is objective evidence that the Group will

not be able to collect all amounts due according to the original terms of receivables. Significant financial

difficulties, probability that the debtor will enter bankruptcy, and default or delinquency in payments are

considered indicators that the receivables are impaired. The amount of the provision is the difference

between the asset’s carrying amount and the present value of estimated future cash flows, discounted at

the effective interest rate. The amount of the provision and subsequent recoveries of amounts previously

written off are recognised in the income statement within ‘other operating expenses’.

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2.11 Financial assets (continued)

Derecognition of financial assets

The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset

expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset

to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of

ownership and continues to control the transferred asset, the Company recognises its retained interest in

the asset and an associated liability for amounts it may have to pay.

If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the

Company continues to recognise the financial asset and also recognises a collateralised borrowing for the

proceeds received.

2.12 Leases

Leases where the significant portion of risks and rewards of ownership are not retained by the Group are

classified as operating leases. Assets leased out under operating leases are included in the balance sheet

under ‘investment property’. Lease income is recognised in the statement of comprehensive income on a

straight-line basis over the period of the lease.

2.13 Trade receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the

effective interest method, less provision for impairment. A provision for impairment of receivables is

established when there is objective evidence that the Group will not be able to collect all amounts due

according to the original terms of receivables. Significant financial difficulties, probability that the debtor will

enter bankruptcy, and default or delinquency in payments are considered indicators that the receivables are

impaired. The amount of the provision is the difference between the asset’s carrying amount and the present

value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision less

subsequent recoveries of amounts previously written off is recorded in the statement of comprehensive

income within 'other operating expenses'.

2.14 Cash and cash equivalents

Cash comprises cash held at banks and on hand. Cash equivalents include demand deposits and term

deposits with original maturities up to three months.

2.15 Inventories

Inventories of materials and spare parts are stated at the lower of cost or net realisable value. Net realisable

value is the estimated selling price in the ordinary course of business, less applicable variable selling

expenses. Cost is determined using the weighted average cost method. Small inventory and tools are stated

at cost less impairment. Slow-moving stock is expensed on the basis of the Management's estimate.

The cost of finished goods and work in progress comprises raw materials, direct labour, subcontracting, other

cost of material and those attributable to manufacturing, borrowing costs and the corresponding production

overheads. Borrowing costs that are directly attributable to the construction or production of an asset are

included in the cost of that asset. Borrowing costs are capitalised as part of the cost of the asset when it is

probable that they will result in future economic benefits to the entity and the costs can be measured reliably.

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2.16 Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are

stated net of transaction costs incurred.

2.17 Trade payables

Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of

business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year

or less (or in the regular operating cycle of the business if longer). If not, they are presented as non-current

liabilities. Trade payables are recognised initially at fair value and subsequently measured at amortised cost

using the effective interest method.

2.18 Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently

stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption

value is recognised in the statement of comprehensive income over the period of the borrowings using the

effective interest method.

Borrowing costs directly attributable to the acquisition or construction of qualifying assets are capitalised

during the period of time that is required to complete and prepare the asset for its intended use. Other

borrowing costs are charged to the statement of comprehensive income. The Group capitalises interest costs

in inventory.

Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent

that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the

draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be

drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the

facility to which it relates.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement

of the liability for at least 12 months after the balance sheet date.

2.19 Current and deferred income tax

Current tax

The current tax liability is based on taxable profit for the year. Taxable profit differs from profit as reported in

the income statement because it excludes items of income or expense that are taxable or deductible in other

years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax

is calculated using tax rates that have been enacted by the balance sheet date.

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2.19 Current and deferred income tax (continued)

Deferred tax

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial

statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for

using the balance sheet liability method.

Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets

are generally recognised for all deductible temporary differences to the extent that it is probable that taxable

profits will be available against which those deductible temporary differences can be utilised

Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial

recognition (other than in a business combination) of other assets and liabilities in a transaction that affects

neither the taxable profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent

that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be

recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in

which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or

substantively enacted by the balance sheet date. The measurement of deferred tax liabilities and assets

reflects the amount at which the Company expects, at the reporting date, to recover or settle the carrying

amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax

assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority

and the Group intends to settle its current tax assets and liabilities on a net basis.

Current and deferred tax for the period

Deferred tax is recognised as an expense or income in profit or loss, except when it relates to items credited

directly to other comprehensive income, in which case the deferred tax is also recognised in other

comprehensive income, or where they arise from the initial accounting for a business combination.

In the case of a business combination, the tax effect is taken into account in calculating goodwill or in

determining the excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets,

liabilities and contingent liabilities over cost.

2.20 Employee benefits

(a) Pension obligations and post-employment benefits

In the normal course of business through salary deductions, the Group makes payments to mandatory

pension funds on behalf of its employees as required by law. All contributions made to the mandatory pension

funds are recorded as salary expense when incurred. The Group does not have any other pension scheme

and consequently, has no other obligations in respect of employee pensions.

(b) Long-term employee benefits

The Group has post-employment benefits to be paid to the employees at the end of their employment in the

Group (either upon retirement, termination or voluntary departure). The Group recognises a liability for these

long-term employee benefits evenly over the period the benefit is earned based on actual years of service.

The long-term employee benefit liability is determined using assumptions regarding the likely number of staff

to whom the benefit will be payable, estimated benefit cost and the discount rate.

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2.20 Employee benefits (continued)

(c) Short-term employee benefits

The Group recognises a liability for bonuses where contractually obliged or where there is a past practice that

has created a constructive obligation. In addition, the Group recognises a liability for accumulated

compensated absences based on unused vacation days at the balance sheet date.

2.21 Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past

events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the

amount has been reliably estimated.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is

determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood

of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the

obligation using a pre-tax rate that reflects current market assessments of the time value of money and the

risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest

expense. This increase is stated under "other operating expenses".

2.22 Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sale of goods and

services in the ordinary course of the Company’s activities. Revenue is shown, net of value-added tax,

estimated returns, rebates and discounts. The Group recognises revenue when the amount of revenue can be

reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have

been met for each of the Group’s activities as described below. (a) Sales of products and services

Sales of goods/products

Sales of goods/products are recognised when the Group has delivered the products to the end customer, and

there is no unfulfilled obligation that could affect the customer’s acceptance of the products.

Sales of services

Sales of services are recognised in the accounting period in which the services are rendered, by reference to

completion of the specific transaction assessed on the basis of the actual service provided as a proportion of

the total services to be provided. The stage of completion is measured on the basis of realised costs until the

end of the reporting period as a percentage of total estimated costs separately for each contract, i.e. project.

The typical duration of services provision is up to one month.

If circumstances arise that may change the original estimate of revenues, costs or extent of progress toward

completion estimates are revised.

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2.22 Revenue recognition (continued)

These revisions may result in an increase or decrease in estimated revenues or costs and are reflected in

income in the period in which the circumstances that give rise to revision become known to management.

Revenue recognition for long-term ship and engine construction contracts is discussed in accounting policy

2.23 – Ship construction contracts.

(b) Interest income

Interest income is recognised on a time-proportion basis using the effective interest method.

2.23 Ship construction contracts

Ship construction contract costs are recognised when incurred.

When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised

only to the extent of contract costs incurred that are likely to be recoverable.

When the outcome of a construction contract can be estimated reliably and it is probable that the contract

will be profitable, contract revenue is recognised over the period of the contract. When it is probable that

total contract costs will exceed total contract revenue, the expected loss is recognised as an expense

immediately. The Group accounts for such expected losses within "Provisions".

The Group uses the percentage of completion method to determine the appropriate amount of revenues

and costs to recognise in a given period. The stage of completion is measured by reference to the contract

costs incurred up to the balance sheet date as a percentage of total estimated costs for each contract.

Costs incurred in the year in connection with future activity on a contract are excluded from contract costs in

determining the stage of completion. They are presented as inventories (as work in progress), prepayments or

other assets, depending on their nature. Contract work in progress is stated at actual cost. Actual cost includes

both direct and indirect costs of production. Indirect costs of production, such as depreciation, maintenance

cost, energy and administrative costs of production lines are allocated to contract work in progress in proportion

to actual labour hours.

The Group presents as an asset (amounts due from customer for contract work) the gross amount due from

customers for contract work for all contracts in progress for which costs incurred plus recognised profits

(less recognised losses, but excluding provisions for expected losses which are accounted for within

“Provisions”) exceed progress billings.

The Group presents as a liability (amounts due to customer for contract work) the gross amount due to

customers for contract work for all contracts in progress for which progress billings exceed costs incurred

plus recognised profits (less recognised losses, but excluding provisions for expected losses which are

accounted for within “Provisions”).

2.24 Government grants

Government grants are not recognised until there is reasonable assurance that the Group will comply with

the conditions attaching to them and that the grants will be received.

Government grants are recognised as income over the periods necessary to match them with the costs for

which they are intended to compensate, on a systematic basis. Government grants that are receivable as

compensation for expenses or losses already incurred or for the purpose of giving immediate financial

support to the Group with no future related costs are recognized in profit or loss in the period in which they

become receivable.

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2.24 Government grants (continued)

The Group recognises revenue from government grants for restructuring in the period in which the grant

was received and which can be demonstrated to have appropriately implemented the restructuring

measures for which the grant was given.

2.25 Mutual cancellations and other non-cash settlements

A portion of receivables and liabilities are settled by mutual cancellations and other non-cash settlements

including debt instruments such as promissory notes and bills of exchange. Sales and purchases that are

expected to be settled as stated are performed at fair value.

2.26 Value added tax

The Tax Authorities require the settlement of VAT on a net basis. VAT related to sales and purchases is

recognised and disclosed in the balance sheet on a net basis. Where a provision has been made for the

impairment of receivables, an impairment loss is recorded for the gross amount of the debtor, including

VAT.

2.27 Earnings/(loss) per share

The Group presents basic and diluted earnings/(loss) per share data for its ordinary shares. Basic earnings

per share is calculated by dividing the profit or loss attributable to ordinary shareholders by the weighted

average number of ordinary shares outstanding during the period decreased by treasury shares. Diluted

earnings per share is calculated by dividing the profit or loss attributable to ordinary shareholders by the

weighted average number of ordinary shares outstanding during the period decreased by treasury shares

and potential shares arising from realised options.

NOTE 3 – FINANCIAL RISK MANAGEMENT

3.1 Financial risk factors

The Group’s activities expose them to a variety of financial risks: market risk (including currency risk, cash

flow interest rate risk and price risk), credit risk and liquidity risk. The Group does not have a written risk

management programme, but overall risk management in respect of these risks is carried out by the

Group’s Management/Finance department.

(a) Market risk

(i)Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency

exposures, primarily with respect to the US dollar (USD) and the Euro (EUR) and due to its foreign currency

balance sheet gap. About 22% of assets (2015: 24%) and 49% of liabilities (2015: 45%) are denominated in

foreign currencies. Movements in exchange rates between the US dollar, EUR and Croatian kuna (HRK),

therefore, have an impact on operating results. The Group does not actively hedge its exposure to foreign

exchange risk.

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3.1 Financial risk factors (continued)

At 31 December 2016, if the EURO had weakened/strengthened by 1% against the HRK (2015: 1%), with

all other variables held constant, the profit/loss for the reporting period would have been HRK 11,973

thousand (2015: HRK 6,674 thousand) higher/(lower), mainly as a result of foreign exchange gains/(losses)

on translation of EURO-denominated borrowings, trade receivables, amounts due from customers for

construction contracts, trade and other payables and foreign cash funds.

At 31 December 2016, if the USD had weakened/strengthened by 5% (2015: 5%) against the HRK, with all

other variables held constant, the profit/(loss) for the reporting period would have been HRK 5,503

thousand (2015: HRK 4,809 thousand) higher/(lower), mainly as a result of foreign exchange gains/(losses)

on translation of USD-denominated borrowings, trade receivables, amounts due from customers for

construction contracts, trade and other payables and foreign cash funds.

(ii) Cash flow and fair value interest rate risk

The Group’s interest rate risk arises from long-term borrowings (Note 27). Borrowings issued at variable

rates expose the Group to cash flow interest rate risk.

The Group does not use derivative instruments to actively hedge cash flow and fair value interest rate risk

exposure.

At 31 December 2016, if interest rates on currency-denominated borrowings had been 1% higher/lower

(2015: 1%), with all other variables held constant, the result for the year would have been HRK 14,623

thousand (2015: HRK 11,379 thousand) lower/higher, mainly as a result of higher/lower interest expense

on variable-rate borrowings.

(iii) Commodity price risk

The Group is exposed to the risk of changes in steel prices on the global market because it uses various

steel profiles and steel products in the construction of ships.

At 31 December 2016 and 2015, if the steel prices would have increased/decreased by 5% (2015: 5%), with

all other variables held constant, the result for the year would have been HRK 11,447 thousand (2015: HRK

7,872 thousand) lower/higher as a result of increased/decreased costs of materials in ferrous metallurgy.

(b) Credit risk

The Group’s assets subject to credit risk, primarily include cash, trade and other receivables. The Group

has policies in place to ensure that sales of products are made to customers with an appropriate credit

history, within previously defined credit limits. Credit risk with respect to loan receivables is limited due to

the fact that most loans are granted to employees. Provisions for impairment of trade and other receivables

have been made based on credit risk assessment. Management monitors the collectability of receivables

through monthly reports on individual balances of receivables. The amount of all trade and other

receivables has been written down to their recoverable amount. Credit risk with respect to loan receivables

is minimal. The Group has policies that limit the amount of credit exposure to any financial institution. A

detailed analysis and maximum exposure to credit risk are shown in Note 17. Furthermore, estimates and

assumptions related to credit risk and impairment of loans and receivables are set out in detail in Note 4.

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3.1 Financial risk factors (continued)

(c) Liquidity risk

The table below analyses the Company's financial liabilities at the reporting date according to contracted

maturities. The amounts disclosed in the table are the contractual undiscounted cash flows.

Up to 1

year

1-2 years

2-5 years

Over 5 years

Total

At 31 December 2016

Trade and other payables 451,732 - - - 451,732

Borrowings 1,313,380 733,921 718 - 2,048,019

At 31 December 2015

Trade and other payables 236,638 - - - 236,638

Borrowings 722,283 667,692 7,256 - 1,397,231

3.2 Capital management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going

concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an

optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the

Group may adjust the amount of dividend paid to the shareholders, return capital to the shareholders, issue

new shares or sell assets to reduce debt.

The calculation of the gearing ratio at the reporting date is shown in the table below:

31 December 2016

Borrowings 1,907,325

Less: Cash and cash equivalents (103,781)

Net debt 1,803,544

Equity (108,527)

Capital and net debt 1,695,017

Gearing ratio 106.40

31 December 2015

Borrowings 1,311,715

Less: Cash and cash equivalents (281,678)

Net debt 1,030,037

Equity (3,801)

Capital and net debt 1,026,236

Gearing ratio 100.37

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3.3 Fair value estimation

The carrying value less impairment provision of trade receivables and payables are assumed to approximate

their fair values. Quoted market prices for similar instruments are used for long-term debt. The fair value of

financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the

current market interest rate that is available to the Company for similar financial instruments.

The disclosure of fair value measurements was performed by level of the following fair value measurement

hierarchy:

Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).

Inputs other than quoted prices included within level 1 that are observable for the asset or liability,

either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2).

Inputs for the asset or liability that are not based on observable market data (that is, unobservable

inputs) (Level 3).

The table below present the Group’s assets at fair value as at 31 December 2016 and 2015:

Level 1 Level 2 Level 3 Total

At 31 December 2016

Listed companies 1,236 - - 1,236

Total 1,236 - - 1,236

At 31 December 2015

Listed companies 1,113 - - 1,113

Total 1,113 - - 1,113

The fair value of financial instruments traded in active markets is based on quoted market prices at the

reporting date. A market is regarded as active if quoted prices are readily and regularly available from an

exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent

actual and regularly occurring market transactions on an arm’s length basis.

The fair value of financial instruments that are not traded in an active market is determined by using valuation

techniques. These valuation techniques maximise the use of observable market data where it is available and

rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument

are observable, the instrument is included in level 2.

If one or more of the significant inputs is not based on observable market data, the instrument is included in

level 3.

NOTE 4 – CRITICAL ACCOUNTING ESTIMATES

Estimates are continually evaluated and are based on historical experience and other factors, including

expectations of future events that are believed to be reasonable under the circumstances. The Group

makes estimates and assumptions concerning the future. The resulting accounting estimates will, by

definition, seldom equal the related actual results. The estimates and assumptions that have a significant

risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next

financial year are discussed below.

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NOTE 4 – CRITICAL ACCOUNTING ESTIMATES (CONTINUED)

a) Impairment of receivables and loans

The Group reviews on a yearly basis its loans and receivables portfolio to assess impairment. In

determining whether an impairment loss should be recorded in the statement of comprehensive income, the

Group makes judgements as to whether there is any observable data indicating that there is a measurable

impairment in the estimated future cash flows from a portfolio of loans and receivables before the

impairment can be identified with an individual loan or receivable in that portfolio.

b) Recognition of revenue from construction

The Group uses the percentage-of-completion method to determine the appropriate amount of income from

construction contracts for a given period. The stage of completion is measured by reference to the contract

costs incurred up to the balance sheet date as a percentage of total estimated costs for each contract. If the

stage of completion had increased by 10%, the Group's revenues for 2016 would have increased by HRK

73,062 thousand (2015: HRK 50,692 thousand), whereas if the stage of completion would have decreased

by 10%, the Group's revenues would have decreased by HRK 79,121 thousand (2015: HRK 70,269

thousand).

c) Expected losses on new-buildings

When it is probable that total contract costs will exceed total contract revenue, the expected loss is

recognised as an expense immediately.

Expected losses represent the difference between the estimated expected cost of each contract and the

selling price. In 2016, Management estimated expected losses both for contracts on which work has started

and those on which it has not yet started in the amount of HRK 29,063 thousand.

If the level of planned expenses had increased by 10%, the Group's expected losses for 2016 would have

increased by HRK 10,991 thousand (2015: HRK 111,698 thousand), whereas if planned expenses had

decreased by 10%, the Group's expected losses would have decreased by HRK 10,991 thousand (2015:

HRK 111,698 thousand).

d) Legal claims and disputes

Provisions for legal claims and disputes are recorded based on Management's best estimate of probable

losses after consultation with legal counsel.

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NOTE 5 – SEGMENT INFORMATION AND SALES

The segment information for the year ended 31 December 2016 is as follows:

Shipbuilding Engineering

Manufacturing of equipment

Other Intra-group transactions

Total Group

Sales 2,242,308 106,513 50,021 76,828 (544,905) 1,930,765

Operating loss (115,496) (15,357) (459) (18,952) 85,704 (64,560)

Net finance

income/(costs) (75,936) 2,555 (148) (8,229) (2,458) (84,216)

Losses of

associates - net - - - - (10,723) (10,723)

Result before

taxation (191,433) (12,802) (607) (27,181) 72,524 (159,499)

Income tax (13,481) - - (48) - (13,529)

Net loss (204,914) (12,802) (607) (27,229) 72,524 (173,028)

The segment information for the year ended 31 December 2015 is as follows:

Shipbuilding Engineering

Manufacturing of equipment


Total Group

Sales 1,447,200 52,524 36,678 60,720 (268,946) 1,328,176

Operating income 39,851 (17,654) (1,470) (15,081) 31,121 36,767

Net finance

income/(costs) (126,616) (532) (345) (5,292) 28,850 (103,935)

Losses of

associates - - - - 96 96

Result before

taxation (86,765) (18,186) (1,815) (20,373) 60,067 (67,072)

Income tax (3,421) - - (88) - (3,509)

Net loss (90,186) (18,186) (1,815) (20,461) 60,067 (70,581)

The balance of assets and liabilities at 31 December 2016 by business segments is as follows:

Shipbuilding Engineering Manufacturing of equipment


Total Group

Total assets 6,008,030 218,132 123,536 584,019 (2,848,172) 4,085,545

Total liabilities 5,753,665 255,513 34,163 403,763 (2,381,723) 4,065,381

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The balance of assets and liabilities at 31 December 2015 by business segments is as follows:

An overview of revenue realised with external customers on the domestic and foreign markets is presented

below:

2016 2015

Foreign sales 1,895,379 1,289,536

Domestic sales 35,386 38,640

1,930,765 1,328,176

Sales mostly relates to contraction contract revenues recognized in accordance with stage of completion, in

2016 these revenues amounted to HRK 1,861,304 thousand (2015: HRK 1,246,916 thousand).

Service revenues in 2016 amounted to HRK 27,303 thousand (2015: HRK 41,768 thousand).

NOTE 6 – GOVERNMENT GRANTS

2016 2015

Recognised grants from the Croatian Ministry of Economy for restructuring

141,245 136,192

Other subsidies 488 1,006

141,733 137,198

Recognised grants in the amount of HRK 141,245 thousand (2015: HRK 136,192 thousand) refer to

recognition of adequate proportion for grants for restructuring costs pursuant to the Agreement on the sale

and transfer of shares of Brodograđevna industrija 3. Maj d.d., Rijeka (hereinafter: the "Agreement") and the

Restructuring programme of Brodograđevna industrija 3. Maj d.d., Rijeka (hereinafter: the "Restructuring

programme"). Based on fulfilling the conditions stipulated in the Agreement for the receipt of grants, and in

accordance with the intended use of support in line with the Restructuring programme and investment

dynamics, the Group recognized the stated amount of income relating to the contribution of the Republic of

Croatia in restructuring the Group. In 2014, the Group recorded a correction of retained earnings in the

amount of HRK 176,372 thousand on the basis of state subsidies aimed at covering losses from 2010 and

2011. In 2015, HRK 198,557 thousand was collected, of which HRK 62,365 thousand relates to coverage of

losses decreasing the receivable from the State, and the remaining HRK 136,192 thousand was recognized

in profit and loss.

In 2016, HRK 177,632 thousand was collected on the basis of the Restructuring programme, of which HRK

141,245 thousand was recognized in profit or loss, and the remaining HRK 36,387 thousand related to

coverage of losses decreased the receivable from the State.

Shipbuilding Engineering Manufacturing of equipment


Total Group

Total assets 4,254,246 72,166 106,885 380,859 (1,841,078) 2,973,078

Total liabilities 3,829,968 127,528 16,905 263,996 (1,386,277) 2,852,120

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NOTE 7 – OTHER INCOME 2016 2015

Release of provisions - net (Note 28) 41,189 40,219

Insurance claims recovered 1,424 1,305

Collected receivables written off 123 122

Inventory surpluses 780 246

Other 12,378 9,907

55,894 51,799

NOTE 8 – COST OF MATERIALS AND SERVICES

2016 2015

Raw materials and supplies

Raw materials and supplies used 1,116,070 747,800

Energy and water used 31,425 25,322

Cost of goods sold 1,033 729

1,148,528 773,851

External services

Product development services 255,782 120,142

Intellectual services 6,338 19,101

Rentals 4,322 5,685

Utility services 12,031 12,190

Transportation services 2,352 2,235

Intermediation 19,652 11,178

Licences 6,897 4,814

Protection clothes 9,628 6,817

Maintenance services 6,551 5,691

Other 37,282 15,608

360,835 203,461

1,509,363 977,312

NOTE 9 – STAFF COSTS

2016 2015

Net salaries 325,422 296,279

Taxes and contributions from and on salaries 211,631 191,740

537,053 488,019

Other employee benefits 39,030 38,991

Release of provisions – net (Note 28) 2,218 (836)

578,301 526,174

Number of employees 4,369 4,011

In 2016, pension fund contributions amounted to HRK 83,848 thousand (2015: HRK 80,031 thousand).

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NOTE 10 – OTHER OPERATING EXPENSES

2016 2015

Bank charges (commissions and fees) 68,058 62,926

Concession 17,173 10,847

Insurance 11,367 9,631

Fines, penalties and compensation for damages 9,383 3,019

Donations 3,667 988

Taxes, contributions and other charges irrespective of business result 2,179 10,038

Entertainment expenses 752 731

Supervisory Board fees 756 782

Impairment of receivables 1,029 371

Memberships, contributions and similar 1,546 1,208

Other 32,648 21,399

148,558 121,940

NOTE 11 – OTHER GAINS – NET

2016 2015

Foreign exchange losses from operations (214,816) (100,681)

Foreign exchange gains from operations 219,798 119,635

Gains on change in fair value of financial assets 123 (114)

5,105 18,840

NOTE 12 – FINANCE COSTS AND INCOME

2016 2015

Finance costs

Interest (104,713) (78,161)

Foreign exchange losses (58,189) (65,476)

Other (162) (9,801)

(163,064) (153,438)

Finance income

Foreign exchange gains 47,959 41,019

Interest income 23,598 2,438

Fair valuation of receivables 2,897 5,968

Other 4,394 78

78,848 49,503

Finance costs - net (84,216) (103,935)

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NOTE 13 – INCOME TAX

The following table presents the reconciliation of income tax expense from the statement of comprehensive

income and the amount of income tax calculated at the statutory income tax rate:

2016 2015

Loss before tax (159,499) (67,072)

Income tax at 20% (31,900) (13,414)

Tax effects arising from:

Consolidation adjustments (2,056) (8,357)

Income not subject to tax and deductions (23,782) (37,304)

Expenses not deductible for tax purposes 7,161 3,722

Utilisation of previously unrecognized tax losses - (2)

Tax losses for which no deferred income tax asset was recognized

64,106 58,864

Income tax 13,529 3,509

The Croatian Income Tax Act is subject to varying interpretations and changes in respect of expenses

which decrease the tax base. The Management Board’s interpretation of such legislation as applied to the

transactions and activities of the Company may be challenged by the relevant authorities. The Tax

Administration may be taking a different position in their interpretation of the legislation and assessments,

and it is possible that transactions and activities that have not been challenged in the past may be

challenged. The Tax Administration may start performing an inspection within three years following the year

in which the tax liability is reported for a specific financial period.

The subsidiary 3. MAJ Brodogradilište d.d. has a right not to record an income tax liability even when

realising tax profit based on the Act on Governing the Rights and Obligations of Shipyards in the Process of

Restructuring (Official Gazette 66/2011) and in accordance with Article 11 of the Agreement on the sale and

transfer of shares of Brodograđevna industrija 3. MAJ d.d. Rijeka. The established tax debt incurred due to

implementing the shipyard restructuring process is offset against the tax loss, and the remaining debt is

written off.

The total tax loss carry forward on the Group level is as follows:

Year 2016 2015

2016 - 129,104

2017 107,142 107,142

2018 448,908 449,854

2019 322,073 301,575

2020 308,061 308,132

2021 335,181 -

1,521,365 1,295,807

Deferred tax assets

Deferred tax assets arising from tax losses are recognised only to the extent that it is likely that the related

tax relief will be realised. Tax losses have not been recognised in the Group's financial statements due to

the uncertainty of their utilisation in the future. As at 31 December 2016, deferred tax assets not recognised

in these financial statements amounted to HRK 273,846 thousand (2015: HRK 259,161 thousand). Deferred

tax asset has been calculated on the basis of 18% tax rate in accordance with changes in tax regulations

(2015: 20%).

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NOTE 13 – INCOME TAX (continued)

Deferred tax liability

The Group recognized deferred tax liability in the amount of HRK 19,537 thousand on the basis of

revaluation gain of specific equipment for motor construction and on the basis of differences between fair

value of acquired assets of 3. MAJ Motori i dizalice d.d. and their tax basis.

2016 2015

Non-current portion 18,723 -

Current portion 814 -

Total 19,537 -

NOTE 14 – INTANGIBLE ASSETS

Concessions,

patents, licences,

software and other rights

Total

Development expenditure

Assets under

construction

Cost

1 January 2015 18,557 327,829 1,135 347,521

Additions - - 4,601 4,601

Transfer from tangible assets - - 402 402

Transfer 3,696 976 (4,672) -

Disposals - (8) - (8)

31 December 2015 22,253 328,797 1,466 352,516

Additions - - 5,691 5,691

Transfer from tangible assets - - 10 10

Transfer 335 1,814 (2,149) -

Revaluation 62 (545) - (483)

Acquisition of subsidiary 2,456 3,077 - 5,533

31 December 2016 25,106 333,143 5,018 363,267

Accumulated amortisation

1 January 2015 320 150,156 - 150,476

Amortisation charge for the year 4,050 9,375 - 13,425

Disposals - (8) - (8)

31 December 2015 4,370 159,523 - 163,893

Amortisation charge for the year 4,428 9,281 - 13,709

31 December 2016 8,798 168,804 - 177,602

Net book amount

31 December 2015 17,883 169,274 1,466 188,623

31 December 2016 16,308 164,339 5,018 185,665

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40

NOTE 15 – PROPERTY, PLANT AND EQUIPMENT

Land and

buildings

Plant and equipment

Tools, plant

inventory and

transport vehicles

Assets under construction and advances

Other Total

Cost

1 January 2015 192,264 1,232,504 432,688 34,613 782 1,892,851

Additions - - - 7,060 - 7,060

Exchange differences - - 19,452 - - 19,452

Transfer to use 1,011 1,729 4,329 (7,069) - -

Transfer from intangibles - - - (402) - (402)

Disposals (8) (3,496) (3,399) - - (6,903)

Merger effect 3,228 1,239 - (103) - 4,364

31 December 2015 196,495 1,231,976 453,070 34,099 782 1,916,422

Additions - - 55,047 - 55,047

Subsidiary inclusion - - 189,265 - - 189,265

Exchange differences - - 15,384 - - 15,384

Transfer to use 2,907 12,220 16,266 (31,393) - -

Acquisition of subsidiary - 65,495 1,350 - - 66,845

Revaluation surplus 6 27,695 15,853 6 43,560

Transfer to intangibles - - - (10) - (10)

Disposals (8) (2,218) (3,519) (804) - (6,549)

31 December 2016 199,400 1,335,168 687,669 56,945 782 2,279,964

Accumulated depreciation

1 January 2015 120,060 1,075,872 244,551 - - 1,440,483

Merger effect 2,779 1,239 - - - 4,018

Exchange differences - - 1,323 1,323

Depreciation charge 2,397 27,837 16,458 - - 46,692

Disposals (8) (3,453) (3,209) - - (6,670)

31 December 2015 125,228 1,101,495 259,123 - - 1,485,846

Depreciation charge 2,420 24,914 23,162 - - 50,496

Disposals (8) (2,211) (3,503) - - (5,722)

31 December 2016 127,640 1,124,198 278,782 - - 1,530,620

Net book amount

31 December 2015 71,267 130,481 193,947 34,099 782 430,576

31 December 2016 71,760 210,970 408,887 56,945 782 749,344

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41

NOTE 15 – PROPERTY, PLANT AND EQUIPMENT (continued)

For the purpose of its operations, the Group uses land (630,120 m2) and sea (549,565 m2) areas for which

it has obtained a concession from the Republic of Croatia over a period of 32 years starting from 16

September 1999.

The carrying value of pledged property and equipment as at 31 December 2016 amounted to HRK 53,835

thousand (31 December 2015: HRK 48,262 thousand) (Note 27).

NOTE 16 – INVESTMENT PROPERTY

Land Buildings Total

Cost/fair value

At 1 January 2015 55,333 57,988 113,321

Additions/(disposals) - - -

At 31 December 2015 55,333 57,988 113,321

Additions/(disposals) - - -

At 31 December 2016 55,333 57,988 113,321 Accumulated depreciation

At 1 January 2015 - 22,712 22,712

Depreciation charge for the year - 945 945

At 31 December 2015 - 23,657 23,657

Depreciation charge for the year - 945 945

At 31 December 2016 - 24,602 24,602 Net book amount

31 December 2015 55,333 34,331 89,664

31 December 2016 55,333 33,386 88,719

Fair value of land and buildings

The following table analyses non-financial assets carried at fair value, in accordance with the valuation

method. Different levels have been defined as follows:

Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).

Inputs other than quoted prices included within level 1 that are observable for the asset or liability,

either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2).

Inputs for the asset or liability that are not based on observable market data (that is, unobservable

inputs) (Level 3).

Fair value measurement as at 31 December 2016 and 2015

Level 2 Level 3 Total

Land - 55,333 55,333

Buildings - 33,386 33,386

88,719 88,719

The fair value of land and buildings at level 3 was determined by internal assessment of the Management

Board that approximates its carrying value.

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42

NOTE 17a – FINANCIAL INSTRUMENTS BY CATEGORY

The accounting policies for financial instruments have been applied to the line items below: 2016 2015

Assets at the reporting date

Recoverable amount of contraction contracts (note 23) 575,339 370,318

Trade receivables (note 23) 50,516 69,796

Interest receivable (note 23) 2,335 933

Due from state (note 23) 160,719 362,764

Deposits and loans receivable (note 20) 379,981 314,130

Financial assets at fair value through profit or loss (note 21) 1,236 1,113

Cash and cash equivalents (note 24) 103,781 281,678

1,273,907 1,400,732

Trade and other receivables do not include receivables from employees, receivables for taxes and similar

charges and advances receivable.

The above amounts of loans and receivables represents the maximum exposure to credit risk at the

reporting date. The carrying amounts of loans and receivables approximate their fair values. 2016 2015

Liabilities at the balance sheet date – at amortised cost

Trade and other payables 508,582 296,136

Borrowings (note 27) 1,907,325 1,311,715

2,415,907 1,607,851

Trade and other payables do not include tax liabilities, liabilities to employees, taxes and contributions and

advances. NOTE 17b – CREDIT QUALITY OF FINANCIAL ASSETS The credit quality of financial assets that is neither past due nor impaired:

2016 2015

Trade and other receivables

Key customers 25,743 40,099

Other customers 1,315 903

27,058 41,002

The key customers group consists of customers with an amount exceeding HRK 100 thousand.

ULJANIK d.d.




43

NOTE 17b – CREDIT QUALITY OF FINANCIAL ASSETS Cash at bank according to Standard&Poor’s ratings:

2016 2015

Cash at bank

BB 5,468 3,662

BBB- 47,841 171,547

BBB + 646 355

B+ - 10

BB+ 241 -

Without credit rating 49,585 106,104

103,781 281,678

NOTE 18 – INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES

2016 2015

Share Amount Share Amount

Investments in subsidiaries:

BRODO OPUS d.o.o. 100% 20 100% 20

United Shipping Services Sixteen Inc., Liberia - - 100% 1

Maritime Transport Pula One Inc. Liberia 100% 4 100% 4

Maritime Transport Pula Two Inc. Liberia 100% 4 100% 4

Total 28 29

Investments in associates:

United Shipping Services Twelve Inc., Liberia 45.00% 83,056 45.00% 80,743

United Shipping Services Thirteen Inc., Liberia 45.00% 84,242 45.00% 78,620

Fratarski d.o.o. 49.00% 157 49.00% 157

Adriadiesel d.d., Karlovac 28.15% 10,611 28.15% 10,422

Viktor Lenac d.d., Rijeka 34.67% 76,656 34.67% 76,152

Total 254,722 246,094

254,750 246,123

a) Investments in subsidiaries

Summary of subsidiaries which are part of the Group and included in the consolidated financial statements

is presented in note 1. The subsidiary that has material non-controlling interest is solely 3. MAJ

Brodogradilište d.d. The summary information of the this subsidiary is as follows:

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44

NOTE 18 – INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES (continued)

2016 2015

Statement of comprehensive income

Income 887,439 886,170

Expenses (860,402) (742,288)

Loss before tax 27,037 143,882

Income tax - -

Loss after tax 27,037 143,882

Statement of financial position

Non-current assets 398,157 248,761

Current assets 1,285,987 1,298,233

Total assets 1,684,144 1,546,994

Total liabilities 764,064 688,951

Cash flow

Cash flow from operating activities (93,316) 51,647

Cash flow from investing activities (302,575) (60,499)

Cash flows from financing activities 251,768 144,418

b) Investments in associates

The companies United Shipping Services Twelve and Thirteen Inc. are engaged in international maritime

transport. In accordance with the signed agreement, majority ownership guarantees for the repayment of

loan liabilities for each of the associate and all the financial costs are born exclusively by the majority owner.

The company Adriadiesel is engaged in the production of diesel engines and spare parts for diesel engines,

other power plants and providing repair services, machining and heat treatment. Shipyard Viktor Lenac

provides services of overhaul and modification of ships and the construction and repair of offshore

platforms.

2016 2015

At 1 January 246,094 243,627

Share in (loss)/profit of associates (Profit or loss) (10,723) 96

Foreign exchange differences and other adjustments (Other

comprehensive income) 19,351 2,371

At 31 December 254,722 246,094

The summary information of associates is presented in the table below:

Assets Liabilities Income Result

2016

Viktor Lenac d.d. 421,453 212,500 276,917 1,451

Adriadiesel d.d. 125,809 88,015 74,536 676

United Shipping Services Twelve Inc., Liberia 188,041 147,373 11,452 (16,756)

United Shipping Services Thirteen Inc., Liberia 185,566 150,858 8,751 (21,505)

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45

NOTE 18 – INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES (continued)

Assets Liabilities Income Result

2015

Viktor Lenac d.d. 396,695 177,029 535,709 26,201

Adriadiesel d.d. 108,233 71,232 38,794 539

United Shipping Services Twelve Inc., Liberia 187,469 130,590 13,716 (15,434)

United Shipping Services Thirteen Inc., Liberia 192,774 147,475 14,760 (17,410)

In accordance with Shareholders agreement signed with Uljanik plovidba d.d. financial liabilities and finance

costs of associates United Shipping Services Twelve and United Shipping Services Thirteen are entirely

born by that company and are not included in Group’s share of its results.

NOTE 19 – NON-CURRENT RECEIVABLES

2016 2015

Receivables for apartments sold /i/ 26,391 31,445

Provision for receivables for sold apartments (5,495) (6,275)

Other 6,075 9,718

Provision for other receivables (2,000) (1,141)

24,971 33,747

/i/ Loans for the purchase of apartments were given to former employees for a period up to 32 years, with

an interest rate of 1% p.a. These flats were sold under the provisions of the Act on the Sale of Flats with

Tenancy Rights.

The carrying value of non-current receivables approximates their fair value.

NOTE 20 –DEPOSITS AND LOANS RECEIVABLE

2016 2015

Short-term

Loans receivable 7,318 63,374

Provision for impairment of loans - (10,836)

Loans receivable - net 7,318 52,538

Deposits 9,928 74,799

Less: current portion - (4,644)

Total short-term loans 17,246 122,693

Long-term

Loans receivable 51,585 4,644

Deposits 311,150 186,793

Total long-term loans 362,735 191,437

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46

NOTE 20 –DEPOSITS AND LOANS RECEIVABLE (continued)

Loans bear interest rate of 3% to 7% per annum, and are secured by pledge over the movables or

debentures and blank bills of exchange. Long-term portion matures within next two to five years.

The carrying amount of deposits and loans receivable is denominated in the following currencies: 2016 2015

EUR 303,056 245,199

USD 17,933 16,403

HRK 58,992 52,528

379,981 314,130

NOTE 21 – OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 2016 2015

Listed shares (PBZ, Croatia osiguranje, ULJANIK Plovidba d.d.) 1,236 1,113

1,236 1,113

NOTE 22 – INVENTORIES

2016 2015

Raw materials and supplies 763,660 226,225

Work in progress 68,582 43,642

Trade goods and finished products 46 33

Advances for inventories 43,648 42,909

Non-current assets held for sale 854 643

Impairment of slow-moving inventories (20,508) (20,812)

856,282 292,640

In 2016, the cost of goods sold amounted to HRK 2,563,161 thousand (2015: HRK 1,613,258 thousand).

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47

NOTE 23 – TRADE AND OTHER RECEIVABLES

2016 2015

Amounts due from customers for construction work /i/ 575,339 370,318

Domestic trade receivables 19,477 29,518

Foreign trade receivables 36,284 55,225

Provision for impairment of trade receivables (5,245) (14,947)

Trade receivables – net 50,516 69,796

Interest receivable 2,335 933

52,851 70,729

VAT receivable 68,785 43,431

Government grants receivable (Note 6) 133,589 169,977

Receivables from the Ministry of Maritime Affairs, Transport and

Infrastructure - 21,961

Receivables from the Ministry of Economy - 144,365

Receivables from the Ministry of Finance /ii/ 27,130 26,461

Advances 507,349 227,826

Other receivables 53,924 19,394

790,777 653,415

843,628 724,144

1,418,967 1,094,462

/i/ Amounts due from customers for construction work

2016 2015

At beginning of year 370,318 237,091

Contract costs incurred during the year plus recognised gains, minus recognised losses

1,898,750 1,369,798

Invoiced amounts (1,693,729) (1,236,571)

Amounts due from customers for construction work 575,339 370,318

The carrying value of the amounts due from customers for construction work is denominated as follows: 2016 2015

EUR 174,188 -

USD 351,798 340,226

HRK 49,353 30,092

575,339 370,318

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48

NOTE 23 – TRADE AND OTHER RECEIVABLES (continued)

/ii/ Receivables from the Ministry of Finance in the amount of HRK 27,130 thousand (2015: HRK

26,461 thousand) relates to receivables from the amounts paid as a result of the Arbitration

proceeding regarding terminated construction contract.

Trade receivables

Not past due

Past due Total

< than 30 days

30-60 days

60-90 days

90-120 days

> than 120 days

2016 27,058 751 4,713 663 909 16,422 50,516

2015 41,002 12,112 954 842 1,467 13,419 69,796

Movements in the provision for impairment of trade receivables are as follows:

2016 2015

At 1 January 14,947 30,776

Provision for impairment during the year 417 542

Release of provisions (10,119) (16,371)

At 31 December 5,245 14,947

2016 2015

Neither past due nor impaired 27,058 41,002

Past due, but not impaired 23,458 28,794

Past due and impaired 5,244 14,947

55,760 84,743

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49

NOTE 24 – CASH AND CASH EQUIVALENTS

2016 2015

Giro account and cash in hand 40,514 180,634

Foreign currency account 63,186 98,042

Time deposits up to 90 days 17 17

Foreign currency letters of credit 62 2,985

Other 2 -

103,781 281,678

The Group has giro accounts with Privredna banka d.d., Zagreb, Zagrebačka banka d.d., Zagreb , Erste

&Steiermärkische Bank d.d., Rijeka , Veneto banka d.d., Zagreb, OTP banka Hrvatska d.d., Zadar, Istarska

kreditna banka Umag d.d., Umag, Hrvatska poštanska banka d.d.,Zagreb, Primorska banka d.d., Rijeka,

Addiko Bank d.d., Zagreb, Imex banka d.d., Split, Sberbank d.d., Zagreb.

The carrying amount of the Group's cash and cash equivalents is denominated in the following currencies: 2016 2015

HRK 40,532 180,651

EUR 32,991 47,866

USD 30,256 53,159

Other 2 2

103,781 281,678

NOTE 25 – EQUITY

The authorised and registered share capital of the parent company amounting to HRK 100,688 thousand

consists of 3,356,250 shares (2015: 3,356,250 shares). The nominal value per share is HRK 30 (2015: HRK

30 per share). The shareholders are entitled to dividend and one vote per share at the annual and

extraordinary meetings. The latest change in the share capital of the Company was registered at the

Commercial Court in Rijeka on 23 October 2015 by which the share capital was decreased (by the

simplified decrease procedure) from the amount of HRK 302,063 thousand by the amount of HRK 201,375

thousand to HRK 100,688 thousand (nominal value per share decreased from HRK 90 per share to HRK 30

per share).

Reserves include capital reserves formed in accordance with the provisions of Company’s Act in the

amount of HRK 216,566 thousand (2015: HRK 216,566 thousand) formed during the share capital decrease

as described above (non-distributable).

In previous periods, the parent company purchased treasury shares and as at 31 December 2016 it owned

104,375 treasury shares or 3.1099% of the share capital.

By the General Assembly’s Decision from 21 July 2016 the profit of the parent earned in 2015 of HRK

13,133 thousand has been allocated to other reserves.

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50

NOTE 25 – EQUITY (continued) The ownership structure as at 31 December was as follows:

Shareholder

2016

%

2015

%

Croatia osiguranje d.d. 9.93 9.93

CERP/ HZMO - Croatian Pension Insurance Institute 7.74 7.74

Hrvatska poštanska banka d.d. / Kapitalni fond d.d. 6.62 6.62

Hrvatska poštanska banka d.d. / Fund for Financing the Decommissioning of the

Krško Nuclear Power Plant

4.97 4.97

Hypo Alpe - Adria - Bank d.d. / PBZ Croatia osiguranje obvezni mirovinski fond 3.97 3.97

HZZO - Croatian Health Insurance Fund 3.88 3.88

Societe generale - Splitska banka d.d. / Erste plavi obvezni mirovinski fond 3.31 3.31

Treasury shares 3.11 3.11

Adris grupa d.d. 2.47 2.47

CERP / State Agency for Deposit Insurance and Bank Resolution 2.38 2.38

Domestic private individuals 46.22 46.21

Foreign private individuals 0.10 0.10

Other shareholders 5.30 5.31

Total 100.00 100.00

NOTE 26 – NON-CONTROLLING INTEREST

The non-controlling interest in the amount of HRK 128,691 thousand (2015: HRK 124,759 thousand)

entirely relates to the non-controlling interest in the company 3. MAJ Brodogradilište d.d. acquired in 2013

(summarised financial information of this subsidiary is presented in note 18).

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51

NOTE 27 – BORROWINGS

2016 2015

Long-term

Long-term bank borrowings 1,871,158 1,099,889

Finance lease liabilities 4,882 5,791

Long-term other borrowings 6,951 -

Current portion of long-term bank borrowings (1,192,238) (453.040)

Current portion of finance lease (1,579) (1.420)

Current portion of long term other borrowings (2,571) -

686,603 651,220

Liabilities for issued bills of exchange - 44,971

Current portions - (44,971)

Total non-current portions 686,603 651,220

Short-term

Short-term bank borrowings 23,894 161,064

Current portion of long-term bank borrowings 1,192,238 453,040

Current portion of long-term other borrowings 440 -

Current portion of finance lease 1,579 1,420

Current portion of long term other borrowings 2,571 -

1,220,722 615,524

Current portion of issued bills of exchange - 44,971

Total current portions 1,220,722 660,495

TOTAL BORROWINGS 1,907,325 1,311,715

Finance lease liabilities as at 31 December 2016 relate to the liability for financing purchase of equipment

for the welding and pre-assembly of sections and for a sheet metal folder. Finance lease liabilities are

primarily secured by debentures.

Borrowings from commercial banks are primarily secured by debentures and a state guarantee in the

amount of 80% of loan amount, HBOR insurance policy, pledge over the share in Maritime Transport Pula

Four Inc (MTP4), pledge over the ships in MTP’s ownership and ships currently built, term deposit of HRK 5

million and term deposit of EUR 3 million. Borrowings from foreign bank are contacted with the significant

number of covenants. Finance liabilities towards commercial banks are mostly used for financing current

production.

In 2016, the average effective interest rate on the above stated borrowings ranged from 4.4 – 6.8% (2015: 4

– 8.9%).

Maturities of long-term borrowings (current portions included) are as follows:

2016 2015

1 - 2 years 685,948 644,113

2 - 5 years 655 7,107

686,603 651,220

The carrying amounts of short-term borrowings approximate their fair value.

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52

NOTE 28 – PROVISIONS

Provisions for

expected losses on contracts /i/

Unused vacation days

/ii/

Warranty provisions

/iii/

Legal disputes

/iv/

Termination benefits and

jubilee awards /v/

Contingent liabilities

(acquisition) /vi/

Total

At 1 January 2015 348,416 2,926 4,890 24,213 6,186 67,871 454,502

Additional provisions - 1,875 69 2,952 381 - 5,277

Released (100,719) (2,926) (4,201) (9,194) (166) (31,109) (148,315)

Foreign currency difference - - 680 680

Used during the year (76,209) - (2,868) - - (79,077)

At 31 December 2015 171,488 1,875 758 15,783 6,401 36,762 233,067

Additional provisions 29,063 3,936 - 716 156 - 33,871

Released - (1,875) - (5,142) - (36,762) (43,779)

Subsidiary - - 20 686 - - 706

Used during the year (113,052) - - - - - (113,052)

At 31 December 2016 87,499 3,936 778 12,043 6,557 - 110,813

Up to 12 months 87,499 3,936 778 - 94 - 92,307

After 12 months - - - 12,043 6,463 - 18,506

/i/ Provisions for expected losses comprise losses calculated under IAS 11, chargeable to new projects until their final delivery. Expected losses represent the difference

between the estimated expected cost of each contract and the selling price. Expected losses have been estimated both for the contracts on which work has started and

those on which it has not been started yet.

/ii/ Provisions for works within the warranty period have been made for any additional costs expected to be incurred on delivered ships.

/iii/ Provisions for unused vacation days have been made based on the number of unused vacation days for 2016, while at the same time provisions made in the previous

period were reversed.

/iv/ As at 31 December 2016, these are provisions for pending legal disputes initiated against the Group by legal entities, present and former employees, as confirmed by

the legal department. According to the estimates of the legal department, it is likely that the Group will be obliged to pay indemnity for these claims (Note 32).

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53

/v/ Provisions for termination benefits and jubilee awards relate to the estimated amount of termination

benefits and jubilee awards for certain Group companies to which the employees are entitled when

retiring. The provision amounts are discounted to the present value using a discount rate of 3.5%

(2015: 4.85%).

/vi/ Provisions in the amount of HRK 36,762 thousand in 2015 related to contingent liabilities arising under

the Agreement on the sale and transfer of shares of Brodograđevna industrija 3. Maj d.d., Rijeka and

the Restructuring programme of Brodograđevna industrija 3. Maj d.d. Rijeka, which have been

recorded in the consolidated financial statements when determining the fair value of assets and

liabilities of the company 3. Maj Brodogradilište d.d.

NOTE 29 – TRADE AND OTHER PAYABLES

2016 2015

Domestic trade payables 254,054 191,147

Foreign trade payables 184,843 41,030

Liabilities towards SCAC Delmas (SDV) /i/ 56,850 59,498

Interest and fees payable 12,835 4,461

508,582 296,136

Due to employees and members of the Supervisory Board 32,482 27,704

Taxes and contributions payable 44,756 45,371

Other liabilities 83,337 64,633

669,157 433,844

/i/ The liability to the company Bollore Delmas from France, a buyer who withdrew from the construction of 2

ships, are based on a lost court/arbitration proceedings which has been in progress for several years. In

2008, the Commercial Court in Rijeka issued a decision on approving the arbitration decision, and the

company's Management adopted the Decision on recording and disclosing liabilities in line with the

aforementioned decision, which as at 31 December 2016 comprise the principal in the amount of HRK

13,287 thousand (2015: HRK 13,423 thousand), interest calculated at a rate of 8% and amounting to HRK

34,205 thousand (2015: HRK 35,077 thousand) and arbitration costs of HRK 9,358 thousand (2015: HRK

10,998 thousand). The carrying amounts of trade and other payables are denominated in the following currencies:

2016 2015

HRK 262,848 126,857

USD 21,815 16,449

EUR 197,830 96,798

GBP 24,386 55,736

NOK 200 262

Other 1,503 34

508,582 296,136

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54

NOTE 30 – ADVANCES RECEIVED

2016 2015

Liabilities from construction contracts 1,340,498 872,411

Other advances received 465 1,083

1,340,963 873,494

NOTE 31 – RELATED PARTY TRANSACTIONS

Related party transactions are as follows:

Associates 2016 2015

Operating income

Sales 629 6,063

629 6,063

Operating expenses

External services costs 6,639 299

6,639 299

Finance income

Interest income - 8

- 8

Finance costs

Interest charge - 5

- 5

Loans, trade and other receivables

Loans receivable - 358

Trade receivables 343 841

Advances 17,163 3,506

17,506 4,705 Liabilities

Trade payables 1,788 224

1,788 224

Key management compensation

During 2016, total gross salaries paid to the Company's Management Board as well as Supervisory Board

compensation amounted to HRK 32,757 thousand (2015: HRK 25,740 thousand). Key personnel comprises

85 Company’s employees (2015: 62 employees).

ULJANIK d.d.




55

NOTE 32 – CONTINGENCIES AND COMMITMENTS

Legal disputes

Legal disputes in which the Group is the defendant are mostly labour related, i.e. compensations of

damages to workers due to work-related injuries, and disputes of compensations of damages caused by

fatalities, consequences arising from asbestosis or injuries at work.

As at 31 December 2016, the Group made a provision for contingencies from legal disputes and the stated

arbitration in the amount of HRK 12,043 thousand (2015: 15,783 thousand) (see Note 28).

Commitments. As at 31 December 2016, the Group had concluded contracts under which works have not

yet started in the total value of HRK 9 billion (2015: HRK 9.3 billion). Also, the Group committed to fulfil all

restructuring measures in accordance with an Agreement on the sale and transfer of shares of

Brodograđevna industrija 3. Maj d.d., Rijeka and adopted Restructuring programme.

NOTE 33 – LOSS PER SHARE

Basic loss per share

Basic loss per share is calculated by dividing the loss attributable to shareholders of the parent Company by

the weighted average number of ordinary shares in issue during the year, excluding ordinary shares

purchased by the parent company and held as treasury shares. 2016 2015

Loss attributable to owners of the parent (in thousands of HRK) (176,959) (91,501)

Weighted average number of ordinary shares (basic) 3,251,875 3,251,875

Loss per share (in HRK) (54.42) (28.14)

Diluted loss per share

Diluted loss per share for 2016 and 2015 is equal to basic loss per share, since the Group did not have any

convertible instruments or share options outstanding during either 2015 or 2016.

NOTE 34 – ACQUISITION

In 2015 the parent company acquired the company 3. MAJ MOTORI I DIZALICE d.d., purchase

consideration amounted to HRK 1. The investment was classified as a subsidiary held for disposal until 30

November 2016 when the Management’s intention to sell the subsidiary outside the Group changed (the

company 3. MAJ MOTORI I DIZALICE d.d. was merged with the subsidiary within the Group – ULJANIK

Strojogradnja d.d.).

Details of purchase consideration, the net assets acquired and goodwill are presented below.

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56

The assets and liabilities recognized as a result of the acquisition and the related goodwill are as follows:

Fair value

Cash and cash equivalents 49

Trade and other receivables 6,171

Inventory 9,397

Intangibles 5,533

Property, plant and equipment 66,845

Trade and other payables (66,619)

Borrowings (30,320)

Provisions (685)

Deferred tax liability (11,883)

Less: non-controlling interest -

Goodwill 21, 512

Net assets acquired (21,512)

Purchase consideration and cash acquired

2016.

Outflow of cash to acquire subsidiary, net of cash acquired

Cash consideration (HRK 1) -

Less: balances acquired 49

Net outflow of cash – investing activities (49)

NOTE 35 – GOING CONCERN

The Group realised operating loss in 2016 of HRK 64 million (2015: profit of HRK 36 million) and current

liabilities exceed current assets by the amount of HRK 927 million (2015: HRK 350 million) which indicate

the existence of certain uncertainties regarding going concern.

Due to the new contracted work and the status of the Order book which currently includes orders in the

amount of HRK 9 billion at the Uljanik Group level, the primary restructuring objective of the entire Uljanik

Group has been achieved including re-launching of the production process. Consequently, commencing

from 2017, adequate utilisation of the production capacity will be secured as well as realising a positive

operating result on the Group level. With the support of the Government and its grants and guarantees, the

Group plans to provide adequate funds for the timely repayment of short-term borrowings and the normal

functioning of the production process at the Group level.

Given all of the above, Management is of opinion that the use of the going concern assumption in the

preparation of these consolidated financial statements is adequate.

ULJANIK d.d.




57

NOTE 36 – POST-BALANCE-SHEET EVENTS

After the balance sheet date, there were no events that could significantly affect the consolidated financial

statements of the Group as of 31 December 2016 or for the year then ended, which should be disclosed.

NOTE 37 – APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements set out on the previous pages were prepared and approved by the

Company's Management Board on 24 April 2017.

Signed on behalf of the Management Board:

Gianni Rossanda,

President of the Board

Veljko Grbac,

Member of the Board Marinko Grbić,

Member of the Board

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